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MacroLabModel-Facilitated Learning of Essential Macroeconomics
David WheatPhD Candidate in System Dynamics, University of BergenAdjunct Professor, Virginia Western Community College
President, Wheat Resources Inc.
P.O. Box 19234Roanoke, Virginia 24019
540-966-5939540-966-5167 (fax)
AbstractMacroLab is a series of interactive learning environments (ILEs) for introductorymacroeconomics. It is currently used in a distance learning course taught by theauthor. The underlying system dynamics structure consists of a nationalaccounting model of aggregate income and spending, linked with behavioralmodels of consumption, investment, production and pricing, labor and capitalutilization, and fiscal and monetary policy. After a brief review of the problemthat motivated the development of MacroLab, this paper summarizes the rationalefor a solution based on system dynamics and model-facilitated learning principles,highlights key features of the ILE series, and outlines a future research agenda.Workshop participants will gain economic understanding by “test driving” someof the ILEs. In addition, they will gain ILE development skills by experiencingthe step-by-step content delivery process, reviewing the corresponding designprocess, and discussing analogous steps for ILEs in their own fields.
keywords: experiment, interactive learning environment, ILE, macroeconomics,management flight simulator, learning lab, microworld, teaching.
1. The Problem
There is reason for concern over the efficacy of economics instruction. Experiments byWalstad and Allgood (1999) indicate that the value added by economics courses is “minimal.”Wood and Doyle (2002) report similar findings in a large economic literacy survey, concludingthat college and university economics educators should be only “modestly” encouraged by theresults.
With respect to macroeconomics in particular, Cohn et al. (2001) find no significantdifference in learning gain by students who received traditional instruction—graphicalcomparative statics—on a Keynesian concept, compared to those who received only verbal
instruction. In a similar experiment involving a monetary policy topic, students receivinggraphical instruction actually scored lower than those receiving verbal instruction alone.
My own students find it difficult to see how the proliferating textbook graphs relate toone another, and how the variables on different graphs interact to influence economic systemperformance. Indeed, interaction—inherently multiplicative—is de-emphasized by the graphicalapproach, with its emphasis on stacking and adding the components of aggregate spending. Theelusive dynamics of interaction is almost certainly missed by students just struggling to keeptrack of the ceteris paribus assumptions behind each new graph.
Boucher (1995) suggests the “…possibility that by over-concentration on comparativestatics, the [economics] profession may be omitting or playing down the key importance of thedynamic aspects of most economic problems and issues.”
The routine content delivery technique may also impede learning. Becker and Watts(1998) found that about eighty percent of economics classroom contact time was spentlecturing—“chalk and talk”—whether the courses were introductory or advanced. In contrast,the use of techniques to get the students actively engaged in constructing knowledge wasminimal. Even in statistics and econometrics courses, just twenty-two percent of the availabletime was spent in computer labs. Of course, heavy reliance on the lecture style is not prima facieevidence of ineffective instruction. Nevertheless, when coupled with other research that is only“modestly” encouraging to economics educators, such findings force the inevitable questions:What might explain the apparent weakness in methods, and what solution is available?
2. Rationale for a Solution Based on System Dynamics and Model-Facilitated LearningOne hypothesis is that the traditional macroeconomics instructional method—graphical
comparative statics presented in a lecture format—provides a weakly structured learning patternfor most economics students. Forty years ago, Bruner (1963) concluded that “…the most basicthing that can be said about human memory…is that unless detail is placed into a structuredpattern, it is rapidly forgotten.”
Of course, the comparative statics model is very simple, compared to a complexeconomic system characterized by reinforcing and counteracting feedback effects that are oftennon-linear. If there is a weakness in the model, however, it is not because of simplicity. Allmodels—graphical, econometric, or simulation—are simplifications of reality and, as such, are“wrong.” But (continuing to paraphrase) “…some models are useful.”1
Comparative statics fails the usefulness test if its purpose is to explain the behavior of aneconomy during a transition from one equilibrium condition (or stable growth path) to another.Apologists would argue that is not its purpose. However, the essential macroeconomics for mostadults is virtually synonymous with media treatment of such transitions, and public policy debateis dominated by such topics. It is a purpose that needs to be served, and comparative statics failsto do so.
1 The phrase has become a truism in system dynamics circles, yet its origin is obscure, bordering on professionalfolklore. Richmond (2000) attributes it to quality expert, W. E. Deming. More to the point, however, is that thevalidity—and, therefore, the usefulness--of any model depends on its purpose, a principle emphasized by Forrester(1961) four decades ago.
In Macroeconomic Essentials: Understanding Economics in the News, Kennedy (2000)leads off with this rhetorical question:
What do we want our students to be able to do upon completingtheir macroeconomics course—manipulate a 45º-line diagram andderive the multiplier, or interpret and evaluate media commentaryon the macroeconomy? I am not alone in believing that for manystudents the latter is preferable, and that in terms of meeting thislatter goal there is a high opportunity cost associated withpressing students to learn algebraic and graphical derivations.
His textbook is a lucid exposition of fundamental macroeconomic principles, withhundreds of media clips that serve to test student understanding and demonstrate the relevanceand utility of course content. The book contains only a few graphs, but it is neverthelessrigorous in the critical thinking demands placed on student readers. What is missing, however, isBruner’s “structured pattern,” or, in Forrester’s words (1994): “…the framework into which factscan be placed [so that] learning becomes more relevant and meaningful.”
I stand with those who believe that system dynamics provides such a framework, but thatis a testable hypothesis.2 One research frontier is the development of methods for assessing theinstructional value added by interactive learning environments (ILEs) based on system dynamicsmodels. A prerequisite for rigorous evaluation, however, is a consensus on the principles ofeffective ILE development and implementation.
Model Facilitated Learning. In their development of model-facilitated learning (MFL)guidelines, Spector and Davidsen (1998, 2000) and Milrad, Spector, and Davidsen (2003)delineate three stages of encounter between a learner and an ILE. At each stage, they urge aunique instructional approach and expect a different learner development pattern.
The first stage promotes problem orientation. Learners confront a relatively simpleproblem in the subject domain and must offer a solution. Next, the inquiry and exploration stagemakes the underlying model more transparent (Alessi 2000), and learners literally begin to seethe system structure, albeit in a very simplified form such as condensed causal loop or stock/flowdiagrams. This stage also includes “hypothesis formulation and experimentation” that challengeusers to articulate in words and diagrams their understanding of the relationship between systemstructure and behavior. The final stage in the MFL process is the policy development stage,where “learners are immersed in the full complex system and asked to develop rules andheuristics to guide decision making in order to create stability or avoid undesirable situations.”(Milrad, Spector and Davidsen, 2003). A common denominator for all stages is the principle ofgraduated complexity that suggests a developmental sequence of learner challenges.
With only slight modification, these MFL principles frame the design of the MacroLabuser interface and the learning activities described in the third section of this paper. The finalproduct is a set of eighteen interactive learning units that comprise a system for learningintroductory macroeconomics.3
Underlying System Dynamics Model. Much of the structure of the model (that “facilitatesthe learning”) in MacroLab builds on the work of those who pioneered the system dynamics 2 See discussion in the research agenda section.3 MacroLab is currently utilized in the author’s macroeconomics distance learning course for students at VirginiaWestern Community College in Roanoke, Virginia. The series could also be used for self-paced learning.
approach to the study of macroeconomics, some of whom remain at the frontier of that researchinitiative.4
In addition, the model makes use of a traditional macroeconomics concept—circular flowof income and spending—recast in stock and flow terms. Figure 1 is a simplified diagram of thecurrent version of the model, which joins “demand side” and “supply side” sectors of a nationaleconomy.5 Most link-forming arrows have been omitted to improve clarity. Arrows shown areonly those that are in the main reinforcing feedback loop for economic growth (or decline). Thediamond-shaped icons contain sub-models of various decision processes, within which most ofthe counteracting feedback loops operate.
The demand sector—top half of Figure 1—is a system dynamics model of the traditionaltextbook “circular flow” diagram, where the material stocks are trillions of U.S. dollars, and theflow of funds is driven by decisions that affect the timing and distribution of income, privatesector spending and saving decisions, and public sector taxation and spending decisions. Thebottom half of the figure displays the supply sector, and includes the forces driving production
4 Any long list runs the risk of inadvertent omissions, but J. Forrester (1961, 1968, 1980, 1994), N. Forrester (1973,1982), N. Mass (1975, 1980), J. Sterman (2000), and M. Radzicki (1988, 1993) certainly merit short-listacknowledgement. I am deeply indebted to their pioneering efforts, as well as to the guidance provided by E.Moxnes and P. Davidsen at the University of Bergen. Of course, they are in no way responsible for myinterpretations or adaptations, and weaknesses in the MacroLab model are solely my responsibility.5 This version models a closed economy, but an international sector will be added during the fall semester, 2003.
Inventoryreal aggregate
production
real aggregatefinal sales
SavingsA c c t s
Total FactorProductivity
B'nessA c c t s
H'holdA c c t s
disposable privatesector income
consumption
PriceDecisions
short runproduction goal
long runproduction goal
ProductionPlanning
PriceIndex
LaborDecisions
aggregatespending
personal savings
LaborFactor
investment
Interest RateDecisions
productivitygrowth rate
aggregatedisposable
incomeGovtA c c t s
govt purchases
govtsaving
transfer pmts
disposable publicsector income
CapitalFactor
CapitalDecisions
aggregate privatesector income
ConsumptionDecisions
Monetary PolicyDecisions
Fiscal PolicyDecisions
taxes
money supply chgs
productivity chgs
business savings
Figure 1. Simplified stock-and-flow diagram of the complete MacroLab model.
decisions, including the stocks of labor and capital and their associated productivity.6 The twosectors are linked by information feedback. Production information and prices/costs updateincome payments and distributions. Capital decisions determine business saving and investment.Real sales are equivalent to nominal aggregate spending divided by the price index.
Students using the MacroLab series do not encounter the model in Figure 1 until very latein the macroeconomics course. After opening a MacroLab learning unit file, the users are quicklyled to an interface page that contains eighteen buttons, one for each learning unit (Figure 2).
Unit 4: Consumption in the Circular Flow !
Unit 8: Supply & Demand !
Unit 5: Investment in the Circular Flow !
Unit 2: Basic Model !
Unit 16: Monetary Policy, Part 1 !
Unit 6: Government in the Circular Flow !
Unit 9: Economic Growth & Fluctuations !
Unit 10: Labor Utilization & Costs !
Unit 11: Capital Investment & Costs !
Unit 12: Money Supply & Interest Rates !
Unit 17: Monetary Policy, Part 2 !
Unit 14: Fiscal Policy, Part 1 !
Unit 15: Fiscal Policy, Part 2 !
Unit 18: The Big Picture !
Unit 7: The Demand Picture ! Unit 13: The Supply Picture !
Unit 3: Circular Flow of Income & Spending !
Unit 1: Introduction !
Figure 2. Learning Unit Selection Panel
The entire series consists of eighteen ILEs that are stand-alone, model-facilitated learningunits. Together, however, they constitute a learning system. After the initial basic model isintroduced in Unit 2, subsequent learning units add dynamic complexity to that model withoutchanging its structural fundamentals. During the semester, the complete model is revealed andbecomes operational in stages. The design objective is for students to see the basic modelgaining complexity without losing sight of its fundamental structure.
Each of the learning units is a separate Stella file7. Clicking on any of thebuttons—except the red one—opens a text box that provides a brief summary of the selectedlearning unit and describes the location of the file on the user’s computer. A click of the redbutton (“Unit 2: Basic Model” in Figure 2) takes users to the interface page that activates theinstructional process for the selected unit.8
Among other things the user finds in Unit 2, there is the basic model of the entireMacroLab series (Figure 3). It is the foundation structure that supports all subsequentenhancements in later learning units. As in the complete model, the top half of the basic modelcontains the demand decisions, while the bottom half contains the supply decisions. Decisions 6 The fiscal policy and monetary policy decision points are located somewhat arbitrarily in Figure 1. Also, only theforces contributing to the main reinforcing feedback loop (production>income>spending>sales>production) havevisible links. Other links were deleted for diagram clarity. The decision diamonds contain the negative feedbackloops that counteract the main reinforcing loop.7 High Performance Systems (www.hps-inc.com) offers a free demo version of the STELLA simulation software.8 Unit 1 introduces the MacroLab interface and the STELLA software tools, as well as fundamental systemdynamics concepts (stocks, flows, and feedback). It, too, is based on MFL principles but will not be discussed here.
BusinessInventories
production sales
BusinessBank Accounts
All OtherBank Accounts
income
SupplyDecisions
DemandDecisions
spending
IncomeDecisions
Figure 3. Basic Model
about the timing and distribution of income payments link the production flow in the supplysector with the income flow in the demand sector.
The visible loop in Figure 3 is a reinforcing loop showing that the supply side and thedemand side drive each other, and that both Say’s Law and Keynes’ Critique are incompletewhen considered in isolation.9
Inside the decision diamonds are sub-models of counteracting loops that limit theultimate strength of the reinforcing, economic growth loop. The degree to which that growthloop is moderated depends on the adjustment times for the various counteracting feedbackprocesses. The embedded counteracting loops, along with other detailed aspects of Unit 2, arediscussed in the next section, which illustrates MacroLab’s model-facilitated learning process.
It is important to appreciate the fundamental relationship between the complete model inFigure 1 and the basic model in Figure 3. Small pictures of both diagrams are combined inFigure 4, and the similarity should be evident, despite differences in complexity.
On the left of Figure 4, the basic model is reproduced, while the complete model is on theright. The circular flow of income and spending is visible in the top half (“demand side”) ofboth diagrams, while the lower halves contain the supply decisions that drive production.
9 Keynes asserted that the macroeconomic views of Say and Ricardo could be summarized as “supply creates itsown demand.” He said they had it backwards. Using the basic model to distinguish the two theories is discussed inthe research agenda section.
3. Model-Faciltated Learning in MacroLab
This section illustrates how MFL principles have been adapted and implemented inMacroLab, using excerpts from Unit 2. Unless indicated otherwise, the Unit 2 excerpts typifythe layout in each learning unit, which is organized into three main pages:
• Home Page contains information about the purpose of the unit, a diagram ofthe current model, and buttons that reveal the “story” behind the model.
• MacroLab is the page containing the simulation control panel and thelearning activities and assignments.
• Suggested Solutions is a reference page where users can check their work.
Home Page. Recall that the first MFL principle discussed in section two was “problemorientation,” an initial exercise to acquaint users with issues they will confront in the learningactivities. And, indeed, the first simulation activity of Unit 2 provides such an exercise.However, that exercise is in the context of the fundamental challenge for the entirecourse—understanding economic fluctuations in the midst of long-run economic growth—achallenge already introduced in a Unit 1 activity.
Therefore, the home page of Unit 2 (Figure 5) begins with a reminder of what shouldhave been learned in the previous unit, with the implication that the learning objectives arecumulative, and that a review may be appropriate before proceeding.10
10 E.g., behavior of GDP and unemployment, fundamental system dynamics concept (stocks, flows, and feedback),distinctions between mental models and computer models, and guided practice in the use of the software toolsnecessary to operate the ILE.
Figure 4. Basic Model (left) vs. Complete Model (right)
Inventoryreal aggregate
production
real aggregatefinal sales
SavingsA c c t s
Total FactorProductivity
B'nessA c c t s
H'holdA c c t s
disposable privatesector income
consumption
PriceDecisions
short runproduction goal
long runproduction goal
ProductionPlanning
PriceIndex
LaborDecisions
aggregatespending
personal savings
LaborFactor
investment
Interest RateDecisions
productivitygrowth rate
aggregatedisposable
incomeGovtA c c t s
govt purchases
govtsaving
transfer pmts
disposable publicsector income
CapitalFactor
CapitalDecisions
aggregate privatesector income
ConsumptionDecisions
Monetary PolicyDecisions
Fiscal PolicyDecisions
taxes
money supply chgs
productivity chgs
business savings
BusinessInventories
production sales
BusinessBank Accounts
All OtherBank Accounts
income
SupplyDecisions
DemandDecisions
spending
IncomeDecisions
Figure 5. Home Page of a Typical MacroLab Learning Unit
The home page text also clarifies the primary goal of Unit 2: to enable the user to developa preliminary understanding of the basic model, including its reinforcing and counteractingfeedback loops. The goal is operationalized by a set of specific learning objectives that appearwhen users click the button above the model diagram. Successful completion of the activities inUnit 2 should enable students to:
1. Use a few more Stella tools effectively, and demonstrate a better graspof concepts introduced in the previous unit.
2. Write a brief summary of the demand and supply sides of the model,and how they fit together.
3. Identify where, in principle, "GDP" fits in the model, and explain howsales and inventory data can be used to estimate production.
4. Sketch a causal loop diagram that expresses an understanding of thebasic model in action, and explain that diagram.
5. Understand news media stories about the delayed effects of changes intotal (i.e., aggregate) spending in the economy.
Prior to arriving in Unit 2, students would have already encountered the mental modelconcept in a Unit 1 activity and in supplementary reading materials. As a result, achieving“understanding” in the course would have already been expressed in terms of renovation of the
Unit 2: Basic Model !
The first unit acquainted you with the MacroLab interface by exploring trends in GDP and unemployment over the past fifteen years. Also, you were introduced to the fundamental concepts of stocks, flows, feedback, and equilibrium, as well as to the basic procedure for drawing causal loop diagrams.
In addition, you learned some of the ways to navigate the Stella software environment, and use the tools to make things happen. That is the essence of model-facilitated learning: making things happen, observing the results, drafting hypotheses about why the underlying system behaves at it does, and then "making things happen" again to test the hypotheses under different conditions.
The primary purpose of this unit is to enable you to develop a preliminary understanding of the basic model that is used in this course, illustrated by the diagram at right. Click the button at top-right to see the specific learning objectives.
Before proceeding, click the "zoom" button to get a close look at the diagram. Keeping this inital simple picture in mind will be helpful as we develop more complex variations on this basic theme throughout the course.
The story buttons will present the diagram as a set of building blocks, and reveal how the pieces fit together and work as a system. Read the demand and supply stories prior to the "complete" story.
After reading the stories, go to MacroLab for the simulation activities and assignments.
Zoom in for a closer look at this small picture of the model in this unit.
Click the "story" buttons to learn more.
Then go to the MacroLab to run the simulations. !
demand story !
complete story !
Title Page !
Macro Lab !
zoom out !zoom in !
Learning Objectives for this Unit !
supply story !
students’ mental models.11 Thus, the first true learning experience in each unit is to getacquainted with the “current” model in the MacroLab series (i.e., the model that is driving thecurrent learning unit), and that is accomplished in two steps.
First, on the Unit 2 home page, the user is encouraged to “zoom in” and get a close lookat the diagram of the model on that page. The home page diagram always contains the essentialstock and flow structure of the current model, but it is simplified by omitting links that wouldadd more clutter than clarity. It is, in effect, a type of influence diagram for communicatingprimary relationships in the model, rather than a detailed stock-and-flow diagram.
After exploring the total picture, users are directed to the three “story” buttons in Unit2.12 The “story” function in STELLA permits revealing portions of the model in a logicalsequence, accompanied by annotations.13 In Unit 2, the demand-side and supply-side storiesprovide different perspectives on how an economic system functions, and the “complete” storyties together the two perspectives in a loop-closing fashion.14
Clicking the “Demand Story” button reveals the portion of the model in Figure 6, a fewelements at a time. Each time the spacebar is pressed, the diagram takes shape, accompanied byexplanatory text.
BusinessBank Accounts
All OtherBank Accounts
income
DemandDecisions
spending
Figure 6. Demand Side of Basic Model
Demand decisions are made by the spending agents in the model: consumers, businesses,governments, and international customers. In the basic version of the model in Unit 2, the onlyinfluence on demand decisions is information about the income received by the spending agents
11 An instructor assessing student progress in mental model renovation necessarily has some goal in mind, towardwhich the students are hopefully moving. Most likely, the instructor’s own mental model provides both the implicittarget for the students, as well as the conceptual framework for instruction in the course. Instructors are expected toteach what they know. In turn, society hopes that what instructors know is accurate and important, and that students’mental models are being effectively renovated.12 Most learning units have only one story button.13 A powerful feature of the story function is the capability to run a simulation using only the portion of the modelrevealed at particular stages in the story. In Unit 1, for example, a story is used to reveal the stock adjustmentstructure responsible for counteracting feedback. Prior to closing the feedback loop, however, a simulation runreveals that the “incomplete” model generates linear growth when the goal of the system is shocked by a stepincrease. Changing the adjustment time parameter merely affects the slope of the growth pattern. Only when theloop is closed—on the next page of the story—does goal-seeking behavior emerge. That is an important revelationfor students who assume it is the delay parameter itself that creates the counteracting behavior. Running twosimulations within the story demonstrates that it is the feedback loop that generates the goal-seeking behavior.14 See the research agenda section for a discussion of issues raised by a biased instructional perspective (i.e., onethat fails to give a balanced treatment to both the demand- and supply-side sectors of the economy).
(including taxes received by government). Income is a (supply-side driven) flow of funds fromBusiness Bank Accounts to All Other Bank Accounts.
In this model, the essence of demand decision making is continuous revision andimplementation of spending goals in light of changes in income.15 Clicking on the demanddecisions diamond reveals a sub-model of the information stock adjustment process that has acounteracting feedback effect on the positive link between income and spending. Demanddecisions are carried out by spending, which causes a flow of funds from "other bank accounts"to "business bank accounts."
When users finish the story about the demand sector, they return to the home page andclick the “Supply Story” button, which reveals the portion of the model in Figure 7, a fewelements at a time.
BusinessInventories
production sales
SupplyDecisions
Figure 7. Supply Side of Basic Model
Within the model, supply decisions are made by producing agents (i.e., businesses). Inthe basic model, information about the sales rate is the only factor that influences decisions abouthow much to supply. Other influence factors (e.g., inventory levels, availability of labor andcapital, price and cost) are added as the model takes shape in later units. The essence of supplydecision making is the continuous revision and implementation of production goals. (Clickingon the supply decision diamond reveals the sales information stock-adjustment process.)Ultimately, the supply decisions affect the production rate of final goods and services.
Upon completion of the supply sector story, users return to the home page and click the“Complete Story” button. Initially, the demand side of the model re-appears, along with a briefsummary of its previous story. Pressing the spacebar causes the supply side and its summarystory to re-appear. Then the connection between the two sides is accomplished by two steps thatcreate a closed loop. See Figure 8.
15 In later units, other influences on spending are added to the model.
BusinessInventories
production sales
BusinessBank Accounts
All OtherBank Accounts
income
SupplyDecisions
DemandDecisions
spending
IncomeDecisions
Figure 8. Closing the Loop between Demand Side and Supply Side of Basic Model
The first step involves linking production and income. Income decisions are made by theowners of production (or the producing agents on their behalf). The essence of income decisionmaking is the continuous revision and implementation of income payment goals. In this model,that process is driven by information about current production rates. As before, the informationstock adjustment process is revealed by clicking on the decision diamond. Production resultsfrom the combined services of the factors of production (labor, capital, raw materials, energy,etc.). Payment for those services is factor income. When factor income is combined with profitsof the owners of the production, the total is national income
The second step reflects the fact that the spending flow and the sales flow are two sidesof the same coin. Although they represent the same real-world activity, there is a measurementunit difference in the model. Spending is a flow of dollars. Sales, on the other hand, is a flow ofreal goods and services. In this basic model, the sales rate is identically equal to the spendingrate. In later units when the model includes a price sector, sales will be equal to spendingdivided by a price index.16
Closing the loop confirms the mutual dependency of the demand and supply sides of themodel, and illustrates the futility of a “chicken or egg” search for primal causes. When the entireMacroLab series is used as a learning tool, the recommended approach is to follow the numberedsequence shown in Figure 2. Of course, that results in learning the “demand side” of the modelprior the “supply side.” That merely reflects a judgment about graduated complexity, however,and has nothing to do with economic philosophy.17 The demand-side units (3-7) are easier tolearn, and they correlate with the early material in standard textbook arrangements.Nevertheless, if an instructor (or a self-paced learner) preferred to begin with the supply-sideunits (8-13), there would be no problem since they can stand alone pedagogically.
MacroLab Control Panel Page. A click of the “MacroLab” button takes users to the pagecontaining the simulation controls, graphical outputs, and the associated activities andassignments. The typical control panel contains another small picture of the current model, 16 Also, the conversion of real production to nominal income (Figure 8) requires multiplying by a price index.17 See the research agenda section for a related issue.
Step 1to closethe loop
Step 2to closethe loop
augmented by “on/off” switches and other parameter controls (e.g., sliders, dials, or input lists)that permit testing the model under different assumptions. In addition to buttons containinginstructions and assignments, the control panel also includes a stacked set of graphs fordisplaying the simulation results. Figure 9 displays the control panel page for Unit 2.
The dials in Figure 9 permit changes in the adjustment times for each information stock.The spending shock switch causes a small (e.g., 2%) but sharp increase in spending in year 2,only to be followed in year 4 by an equally sharp decrease (perhaps analogous to a two-yearperiod when strong demand abroad increased net exports). When the feedback switch is OFF,any variation in spending is entirely due to the spending shock. When feedback is ON, thenspending will also be affected by changes in income. The random noise (i.e., disturbance) in theproduction rate causes fluctuations that might mimic equipment problems, work stoppages,supply bottlenecks, etc., in a real economy.
Sim A implements the “problem orientation” principle of model-facilitated learning byrequiring users to recall and use concepts introduced in Unit 1 (stocks, flows, equilibrium, andGDP) when the model runs without any test inputs. Stocks and flows have to be identified, andequilibrium has to be explained in stock/flow terms. Moreover, users have to associate GDPwith the production rate in the model, and recognize the essential equality of production, incomeand spending/sales in equilibrium. Finally, the user must use a stock/flow understanding ofdisequilibrium to explain that the sales flow plus changes in the inventory stock will equal theproduction flow.
0.1
1.1
2.0
1.0
income pmtsdelay spending shock
random noise
feedback
0.1
1.1
2.0
1.0
spendingdelay
Graph 1
0.1
1.1
2.0
1.0
productiondelay
MacroLab!
^click leaf to turn page !
Unit 2: Basic Model!
zoom out !zoom in !
Read the Story !Instructions !
Assignment 2.1 !
Sim D !
Sim C !
Sim A !
Sim B !
Assignment 2.3 !Sim
E !
Assignment 2.2 !
Suggested Solutions !
Graph 1. Spending and Sales ($ trillion/year)
0.00 2.00 4.00 6.00 8.00 10.00Years
1 :
1 :
1 :
2 :
2 :
2 :
5.80
6.00
6.201: spending 2: sales
production adj. delay
incomeadj. delays
spendingadj. delay
Figure 9. MacroLab Control Panel for Unit 2
The remaining simulation activity and assignment buttons involve use of the spendingshock and random noise switches, first with feedback OFF and later with feedback ON. Inaddition, the effects of changes in delay times (information stock adjustment times) areevaluated. Through a series of questions, simulation runs, graphical results, the user is led toconclusions about direction of causality, the presence of both a major reinforcing loop and threecounteracting loop processes, and policy questions about the effects of delays. In some cases(e.g., Assignment 2.1 requiring an interpretation of the three stories of the basic model), the useris required to post an answer to a personal electronic bulletin board. In others, users mustcompare their own solutions with the suggested solutions, and post their assessment ofdifferences.
Suggested Solutions. Each set of simulation questions and assignments has acorresponding set of suggested solutions. The user is encouraged to consult the suggestedsolutions for each activity before proceeding to the next one. The culminating assignmentrequires the user to post online an evaluation of their own solutions in light of the suggestedsolutions. Figure 10 shows the Suggested Solutions page for Unit 2.
Suggested solutions are available below. However, before viewing them, keep in mind that this is a self-guided learning activity. You are responsible to yourself.
It is highly recommended that you make a serious effort to answer each question and do each activity fully. After you have made such an effort and as you complete each activity, then it can be instructive to compare your work with the suggested solution. However, a premature "peek" may undermine your learning progress by giving you a false sense of comprehension.
Here's how to proceed to gain maximum benefit:(1) Review the original assignment (e.g., Sim A), repeat the simulation, and review the notes and/or answers you wrote. (2) Critique your original response. Does it still make sense? Modify it if necessary.(3) Click the button below that corresponds to that same assignment (e.g., Sim A), and compare your work with the suggested solution.(4) Make notes to underscore the parts that you understood well and also to correct any misunderstandings. In addition, note any comments that provide useful new insights.
Feel free to email me to discuss any part of this learning unit. ([email protected])!
Suggested Solutions!
Sim E !
Macro Lab !
Sim D !
Sim C !
Sim A !
Sim B ! Assignment 2.2 !
Figure 10. Suggested Solutions Page for Unit 2
The Sim buttons in Figure 10 open text boxes containing suggested solutions for thoseactivities. The Assignment button takes the user to another page, showing causal loop diagrams.Figure 11 provides an example of a solution page for a specific simulation activity, Sim A.
Figure 11. Suggested Solutions for Sim A
Thus, the various simulation activities and the associated questions and assignmentsinvolve users in the various stages of model-facilitated learning. Sim A illustrates problemorientation. Sims B and C culminate in the causal loop diagramming exercise involving inquiry,exploration, hypothesis formulation, and experimentation. Policy assessment is emphasized inSim D, where users consider the time delay circumstances that would be conducive to thesuccess of a particular fiscal policy action.
A central MFL concept is the principle of graduated complexity, and it guides the contentdelivery process in two ways. As explained previously, MacroLab engages users with simplesubsets of the complete model early in the course, and progressively adds complexity. Inaddition, within each week’s learning unit, the principle guides the developmental sequence ofassignments for that unit.
Graph 3
SSA1. Visible stocks: business inventories, business bank accounts, and other bank accounts.Visible flows: production, sales, income, and spending. (Other stocks and flows "not visible" in the picture can be seen by reading the story, and peeking inside the decision diamonds.)--------------------SSA2. In equilibrium, the level of each stock will be unchanging, because the outflow from the stock will be exactly equal to the inflow. The rates of flow can be very rapid, but equilibrium will be maintained as long as the inflows and outflows are equal. Thus, equilibrium does not mean "nothing is happening."--------------------SSA3. The initial equilibrium value for each flow is $6 trillion/year.--------------------SSA4. GDP (Gross Domestic Product) is a nation's annual production rate of all final goods & services, measured in "dollars' worth of final goods & services per year." The "Production" flow in the model represents GDP. Production of "apples and oranges" is difficult to measure. Over a year, the average Sales rate or the average Income would be approximately equal to the Production rate. In practice, the value of the final Sales rate is used for official estimates of GDP, and Income data provide an alternative, independent estimate.--------------------SSA5. In disequilibrium, even a perfect measurement of Sales would not produce an accurate estimate of Production, since the two flows would not be equal. Their difference could be calculated by measuring the change in the Business Inventories stock over the year. The annual Production rate (i.e., GDP) would be equal to the annual Sales rate plus the net change in Inventories during the year. Click "run" on the graph below to see this result. !
Before you "run" go back to MacroLab and turn both "Random Noise" and "Feedback" ON !
GDP is the production rate. In disequilibrium, the sales rate is not equal to the production rate. However, the difference can be found in the change in inventories.
Change in inventories = Production - SalesTherefore, Change in Inventories + Sales = Production
That is how government statisticians estimate GDP. !
Run !
Macro Lab !
Production = Sales plus Inventory Changes
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6.201: production 2: sales 3: sales plus InvChg
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5. Research AgendaSystem Dynamics vs. Comparative Statics. Section two suggested that the graphical,
comparative statics method of teaching macroeconomics fails in two respects. First, it does notprovide an effective learning pattern structure that facilitates student learning. Consider, forexample, the solution to this typical exercise, adapted from Radzicki (1993):
Find the new equilibrium natiional spending and income rates after an exogenousinvestment shock of $10 billion, given an initial equilibrium at $400 billion andan aggregate spending function defined by AE= .80*Y + I.
Figure 12 displays the graphical solution, derived by shifting the spending function up by$10 billion. When combined with the algebraic determinatiion of the multiplier of 5 that isimplicit in the consumption coefficient of .80, the solution is a $50 billion increase in aggregatespending. The difficulty is not in the analytic geometry or the algebra; both are straightforward.The problem is the method’s failure to evoke a vivid mental image of what actually has tohappen in the economy—and what assumptions are necessary—before such a result couldprevail. That failure makes it difficult for students’ mental models to be renovated in any waythat is both useful and sustainable.
Section two also suggested that the comparative statics method fails to provide a realisticpicture of the transition from one equilibrium to another—a transition of paramount importanceto both ordinary citizens and policy makers. Consider, for example, the solution to the previousexercise when graphed over time in Figure 13.
AggregateExpenditure
(AE)
Aggregate Income (Y)
AE = .80*Y + 90AE = .80*Y + 80
400 450
ExogenousInvestment
increase
Figure 12. Graphical ComparativeStatics Solution to Investment Shock
Figure 13. System Dynamics Solutions vs. Comparative Statics Solution
The dashed line represents the implicit comparative statics solution. Granted, mosteconomists and textbook authors acknowledge the issue of time, and they would not deliberatelysuggest that the new equilibrium would be achieved immediately. Few, however, discuss thepractical significance of such delays, particularly those that strengthen counteracting feedbackloops.
Two system dynamics solutions to the same problem are also shown in Figure 13. Thefirst reflects only a “demand-side” perspective on the economy (i.e., the top half of the basicmodel in Figure 3.) The dotted curve displays the effect of gradual adaptation of spendingpatterns due to changes in income set in motion by the exogenous investment shock. The secondSD solution makes use of both the demand and supply sectors of the model. In addition togradual spending adaptations on the demand side, there are also supply-side adjustments tochanges in inventory stocks and desired labor stocks, and the solid curve displays the oscillatorybehavior resulting from the interaction of those counteracting feedback effects.
All three solutions are the same in the long run. However, the short-run business cyclecharacter of the second SD explanation is much more in line with actual experience. As a result,it is more likely to renovate students’ mental models in an accurate, sustainable way. At least,that is the hypothesis. Future research will test this hypothesis in formal experiments withstudents receiving alternative methods of macroeconomics instruction, including the systemdynamics approach that is embodied in MacroLab.
0
Complete Framwork vs. “Biased” Framework. A concern over the efficacy ofmacroeconomics instruction is not limited to strictly cognitive issues. One manifestation oflearning about economics is the attitude that one develops regarding appropriate governmenteconomic policy and, in general, the role of government in the economy, a persistent conflictwith the economics community.18 Since Keynes legitimized the policy of “demandmanagement,” that conflict has sometimes been framed as “supply-siders” vs. “demand-siders.”Does "supply create its own demand" (Keynes’ coinage of Say’s Law), or is it the other wayaround?
On the issue of government’s role, Say’s position is clear:The encouragement of mere consumption is no benefit to commerce; for
the difficulty lies in supplying the means, not in stimulating the desire ofconsumption; and we have seen that production alone, furnishes those means.Thus, it is the aim of good government to stimulate production, of badgovernment to encourage consumption.19
Such a policy perspective is in sharp contrast to Keynes’ conclusion:I expect to see the State…taking an ever greater responsibility
for…investment, since it seems likely that the fluctuations [in private investment]will be too great to be offset by any practical changes in the interest rate.”20
This issue raises a number of questions that might be answered, at least in part, by formalexperiments. In a recent pilot experiment, two small groups of graduate students at theUniversity of Bergen received “biased” macroeconomics lectures. The lecture for one groupfocused on the demand side of the MacroLab model. The subjects studied a model that showedeconomic behavior to be a function of decisions by spending agents in the economy, including anexample of successful demand management by an activist fiscal policy stance by government.The implicit message was that demand creates its own supply, although that phrase was neveractually mentioned.21
The other group received instruction from a supply-side perspective, and the demandside was taken as “a given.” There were no spending agents making demand decisions. Thesales rate was equated to the production rate. It was as if supply created its own demand, 18 The spread and adoption of an academic-based conventional wisdom would seem to be heavily influenced by theparadigm of the profession and the means by which the mental models of both instructors and students are shaped bythat paradigm. Much of that influential shaping, of course, is done by textbooks. Paul Samuelson is quoted assaying, “I don’t care who writes a nation’s laws…if I can write its economics textbooks.” (Skousen, 1997)19 Say, chapter 15.20 Keynes, p. 164.21 The top half of the basic model was expanded in stages to include consumption, saving, investment, andgovernment taxation and spending. The supply sector was always visible, but there was no reference to that side ofthe model. It served merely as a conduit for sales to be transformed into income via the production process. Onesimulation run demonstrated how a sudden decline in consumption spending would be followed by declines in sales,production, and income. Finally, government was added to the model and the effects of changing taxes and spendingwere observed. In particular, due to a policy equation in the government sector, an increase in government spendingwas triggered by the stagnating income, with the result that aggregate spending bottomed out more quickly and ahigher equilibrium value was attained. Potential implications of deficit spending (e.g., impact on inflation or interestrates, crowding out of private investment, future tax requirements) were not discussed.
although that phrase was never mentioned.22
Before and after both lectures, the subjects provided answers to questions designed to taptheir attitudes towards fiscal policy as a stabilization tool, and their preference for governmentspending or business tax cuts as a fiscal stimulus during a recession.
The hypothesis:Subjects receiving “demand-side” instruction would exhibit more of aKeynesian perspective relative to government’s role in the economy.
Operationally, in terms of the pre- and post-test questions, subjects in the “demand-side”group would be more likely to (1) prefer “higher government spending” over “investment taxincentives” as an anti-recessionary policy, and (2) exhibit a more favorable attitude towards theuse of fiscal policy as a stabilization tool. The results, while not statistically significant, wereconsistent with the hypothesis.23
The pilot experiment was informal, highly exploratory, and used crude measurementtechniques. Efforts are underway to improve the experimental design and repeat similarexperiments with a variety of subjects. The primary hypothesis is that instruction presented in a“scientific” manner will cause students to believe it when they see it, even when it is only halfthe story. The next step is to test how such a transformed belief manifests itself. Do card-carrying members of the supply-side group “see” the same data with a different conceptual lens,and reach different conclusions about the state of the economy, compared to their demand-sidesiblings? Do the two groups differ in the kinds of information they search for when seeking toassess the state of the economy? Do the two groups evaluate a policy debate with a bias thatreflects their renovated mental models?
Most importantly, what benefits—in addition to a more accurate understanding ofeconomic systems—accrue to a third group of students who receive a balanced economiceducation that seamlessly combines the demand side and the supply side?
7. ConclusionMacroLab applies system dynamics and model-facilitated learning principles to the
problem of macroeconomics instruction methods. It is a series of interactive learning unitscurrently used as the organizing instructional tool in a distance learning course, and holdspromise as a supplementary tool in traditional undergraduate classroom settings.
Its effectiveness will be evaluated relative to comparative statics methods via formalexperiments. In addition, its capacity to provide a seamless presentation of both the supply- anddemand-sides of the economy will be tested.
Workshop participants will gain economic understanding by test-driving MacroLab, andwill gain ILE understanding by examining the content delivery process and the design process.
22 The supply-side of the model was expanded with detailed assumptions about labor supplies, average workweek,and productivity. The concept of capital was presented as an embodiment of the productivity factor. Labor force,workweek, and productivity were permitted to vary according to historical rates, and the subjects compared thesimulated results between 1900 and 2000 with the actual GDP and employment trends over that period.23 Details of the experiment are available on request.
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